U.S. natural gas looks irresistibly cheap vs oil

By Christopher SwannThe author is a Reuters Breakingviews columnist. The opinions expressed are his own.

America’s natural gas is looking irresistibly cheap. With crude prices rising and gas sliding further, oil is now about eight times dearer than gas based on energy content, according to consultancy Navigant – the biggest gap since Harry Truman was in the White House in the 1950s. Global shifts dictate the price of the black stuff, but local market forces should work on U.S. gas.

In fact they already are, even in gasoline-loyal Detroit. General Motors, for instance, said on Monday that it will start selling dual gasoline and compressed natural gas-powered pickup trucks later this year. In power generation, too, gas has been making most rival fuels – including nuclear, renewables and even coal – look pricey. A glut following several years of aggressive shale drilling has pushed the U.S. gas price down by 37 percent over the past year to its lowest level in decades.

GM’s move is just one example of a shift on the demand side of the equation. Elsewhere in the transport market Waste Management, the garbage disposal firm, said recently that 80 percent of its new trucks were being fueled by natural gas. Meanwhile Dow Chemical, the largest single consumer of natural gas in America, has been stepping up its use. And previously underutilized gas plants are finding increasing favor with electricity generators.

The ramp-up in demand has been slow, however, and as a result supply is falling. Gas producers like Chesapeake Energy and Conoco Phillips have been shuttering wells, and the number of rigs deployed drilling for new gas has halved since 2008. Small wonder: The annual rate of return on gas wells has dropped to between zero and 5 percent against up to 80 percent for oil, investment bank Tudor Pickering reckons.

Really big shifts in demand, for instance the introduction of compressed natural gas into the mass U.S. car fleet, might take political action as well as market forces because of the high cost of refueling infrastructure. Even without that, demand is now noticeably on the up and supply is declining. There’s also plenty of headroom in the cost of gas before it loses its bargain basement appeal. Despite the unpredictable trajectory of the oil price, an upturn in U.S. gas prices finally looks close at hand.